Q3 2019 Earnings Call

Please standby.

Welcome to the Lea and prices 2019 third quarter webcast and conference call. The call is being recorded and will be available for replay beginning later this morning at lead Dot net.

At the close of planned be planned remarks, there will be an opportunity for questions.

Several analysts have been invited to participate also participants accessing this call by webcast may submit written questions through the website and they will be answered during the call as time permits otherwise you will receive a response later.

A link to the live webcast can be found at W.W. Dot Lee Dot net.

Now I will turn the call over to your host Gimi Surat corporate corporate controller.

Good morning, Thank you for joining US speaking on this morning's call will be Kevin Mowbray, President and Chief Executive Officer, and Tim Miller, Vice President and Chief Financial Officer.

Also with us on today's call and available for questions are nascent Becky Vice President consumer sales and marketing and James Green Vice President digital.

Earlier today, we issued a news release with preliminary results for our third fiscal quarter of 2019 is available at lead Dot net as well as at major financial web sites, one housekeeping item to start we acquired certain properties in fiscal year 2019, and dispose of one property in 2018, and these trends are effecting quarter and year to date trends.

We discuss certain revenue and operating expense trends on a same property basis, which exclude the impact of revenue and operating expenses associated with these properties.

As a reminder, this morning's discussion will include forward looking statements that are based on our current expectations.

These statements are subject to certain risks trends and uncertainties that could cause actual results to differ materially such factors are described in this morning's news release.

And also in our SEC filings.

During the call, we make reference to certain non-GAAP financial measures, which are defined in our news release reconciliations to the relevant GAAP measures are included in tables accompanying the release and now to open the discussion is our president and Chief Executive Officer, Kevin Mowbray. Thank you Jamie Good morning, and thank you all for joining the call overall, we're pleased with third quarter operating results. While total revenue was down 4% in the third quarter, a similar trend to last quarter, we delivered solid digital advertising performance spectacular growth in town news and best in class execution The Beach media.

We continue to successfully execute on our strategy to drive digital growth by leveraging our position as a leading source of news information and advertising and attractive mid size markets across the country with huge local audiences and strength across all age groups at the same time, we remain sharply focused on operating efficiency and maintaining our industry, leading margins and strong cash flow.

The addition of digital media expert Megan Lieberman to our board in June further enhances our expertise in the digital space Megan brings a wealth of digital news experience, having held senior executive positions at Sirius XM Yahoos, New Yahoo News group and the New York Times.

For the third quarter total digital revenue, which includes digital advertising and digital services revenue was up 6.9% and totaled nearly 120 million over the last 12 months. This was fuelled by substantial growth in town news, which we'll talk about more in a moment.

Programmatic revenue had its best quarterly trend performance in a year up 6.2% on a same property basis.

Despite soft print advertising trends, which continued into the third quarter, we saw nice growth from digital advertising marketing nearly a decade of quarter over quarter digital advertising revenue growth.

Much of the success in digital advertising is coming from our local controllable retail accounts, which are the core of our business and represents 50% of advertising revenue, making us much less reliant on national retail advertising, our local sales teams have direct contact and strong relationships with key local and regional decision makers, which allows revenue from this category to outperform overall advertising trends.

Edison is our go to market sales approach for local retail accounts with a focus to drive reach and frequency across our print and digital platforms with at least a 90 day advertising commitment Edison revenue was up 13.3% and customer counts are increasing up almost 8% over Q2, we relaunched edison across all of our markets in Q3 with a fresh look and streamlined focus on digital centric customers. We're optimistic that the relaunch of Edison will improve local retail revenue trends in the future.

Our amplified digital agency in St. Louis, which is a centralized approach selling custom digital advertising and marketing campaigns continues to outpace our expectations. Our agency approach is anchored by agency level creative a complete suite of print and digital media with custom promotion and events when appropriate.

Revenue from the amplified digital agency was up 32% in the third quarter, we expect that trend to continue throughout F y 19.

Through initiatives like Edison or anti digital agency remains steadfast in our efforts and we're confident we can grow revenue from local retail accounts.

As you May recall, we launched a membership and rewards program, we call news plus in our markets in March and April the news plus membership model combines premium content and rewards programs and offers more access to content for digital subscribers.

News plus as five tiers of benefits and rewards three or full access that include print and all digital access in two of the tiers. Our digital only we believe that by having different tiers of rewards and benefits as well as different price points. The news plus membership model will improve retention and provide more opportunities for strategic pricing actions.

On our last call we discussed the upcoming volatility of subscription revenue in the third quarter and net subscription revenue was down 3.2% on a reported basis and 5.3% on a same property basis. We believe the worsening trend was mostly due to the timing from the launch of news plus and we believe the trend will improve in our September quarter. In fact, we're already seeing a significant improvement in subscription trends in the current quarter.

Our audiences are massive reaching nearly 80% of all of the adults in our larger markets, where nearly half of our audience reads. Our printed products. We continue to experience a significant increase in digital content consumption. Therefore, we're growing our digital only subscriber base will continue to be a key area of focus for us at least in the third quarter of 2019, our digital only subscriptions increased 72% and now totals 79000, we expected nearly double our digital only subscriptions in fiscal year 2019.

As I mentioned earlier on the call we had aggressive growth at town news, which is the leading provider of integrated digital publishing and content management solutions total revenue town news on a stand alone basis, which includes revenue earned from serving Lee markets increased 27.3% in the third quarter over the last 12 months revenue totaled 22.1 million with adjusted EBITDA margins of more than 40%.

The growth in town news is coming from a 10.2% growth in the core CMS offering and a 10.8% growth in CMS town news is high value content management system.

Town News also grew revenue from its ancillary offerings like video streaming services. The technology to offer first class video streaming services to our customers was acquired in early calendar year 2018, and generated almost zero point $5 million in revenue in the third quarter ton is also benefited from the Q2 acquisition of Gtx sell Wordpress space CMS business.

We believe the town is posed to drive substantial future revenue growth by further expanding market share continued diversification of our customer base customer base as we penetrate broadcast and other markets and increase after the average revenue per user.

When we announced the agreement to manage the operations of Beach Media Group last June we said $150 million in total fees or the initial five year agreement with at least 9 million coming in the first year June marked the culmination of our first year under the management agreement, we earned $11.3 million in total fees in the first year exceeding initial expectations by $2.3 million.

Our year to strategy and budget has been approved by Berkshire Hathaway and we're optimistic for another great year in 2020.

We had strong execution on the cost side in the third quarter and adjusted EBITDA totaled 30 million $30.7 million in the quarter are down just 1.3% compared to prior year, Tim will provide more detail in a moment, where there certainly are industry challenges. We believe we have the right course strategies that will continue to produce industry, leading performance to reiterate overall, we're pleased with our third quarter operating results and remain optimistic about the future here's Tim to discuss additional filings financial highlights.

Thank you, Kevin and good morning, everyone.

We continue to transform our business models drive efficiencies across our company and reduce our legacy cost structure cash costs on a same property basis were down 7.6% in the third quarter and are down 5.2% in the year to date period.

In our third quarter compensation costs were down 6.6% due to an 8% reduction in ft ease.

Much of the head count reductions are due to ongoing business transformation initiatives, including centralize money centralizing many back office functions and outsourcing production operations.

Currently nearly 70% of our daily newspapers are printed off site with the majority of those printed by other lead markets. We also offered early retirement programs and our second quarter, which is helping reduce our FTD numbers in our compensation costs.

Newsprint and ink expense decreased 18.8% in the quarter driven by declines in print circulation volumes as well as lower prices for newsprint.

We have now cycled the significant increase in prices that we saw throughout much of 2018 and are starting to see supply demand dynamics come back in our favor.

Newsprint prices look to be stable or down modestly for the remainder of the fiscal year.

Other operating expenses decreased 2% in the quarter, primarily driven by lower delivery costs.

Cash costs on a same property basis were down 7.6% in the quarter and for fiscal year 2019, we expect cash costs to decline between 4.75% and 5.5% on a same property basis.

That's an improvement from our previously announced announced guidance.

As Kevin mentioned total revenue trends in the third quarter were consistent with trends in our second quarter and our cost reductions accelerated this pretty strong adjusted EBITDA of $30.7 million in the quarter or down 1.3% from the prior year.

Over the last 12 month, adjusted EBITDA totaled $125.5 million.

Also in our third quarter debt was reduced by $17.9 million.

With strong into adjusted EBITDA, and a commitment to debt reduction our leverage net of cash now stands at three and a half times.

Our outstanding debt obligations much mature in March of 2022, and we continue to evaluate addressing our debt maturities early.

Our goals in an opportunistic refinancing remains to reduce our cost of capital have less restrictive covenants than we have today for such things as stock buybacks and to extend the maturities of our debt.

Also of consideration is the breakage costs of our current debt, which totals 9 million today, but is reduced to zero in March of 2022 or 2020.

We are committed to reducing our leverage in one way. We're doing this is to monetize non core assets, including excess real estate and investments.

Currently we have identified approximately $26 million of excess real estate that is either under contract or listed for sale with additional properties that are being evaluated for sale in the future.

We also have a private equity investment worth approximately $10 million that were working to monetize.

As a reminder, in the event assets owned by one of our Pulitzer subsidiaries, whose sole those proceeds will also be used to repay the second lien term loan at par.

We believe these actions will help us reduce our overall leverage.

In fiscal year 2018, we use all of our remaining federal tax net operating losses and became a taxpayer in 2019.

We expect to pay between eight and $9 million in federal income taxes in fiscal year, 19 of which 6.3 million has been paid to date.

Lastly, we expect to file our 10-Q with the SEC Tomorrow and as always it will include additional information on our results and expectations and 8-K with supplemental Lee legacy unfolds or financial data will also be filed tomorrow.

This concludes our remarks the team will remain on the line for any questions you may have.

Following questions asked by telephone we will answer any submitted during the webcast operator. Please open the line for questions.

Thank you at this time, we'll be conducting a question and answer session for those analysts who have been invited to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate that your line is in the question queue. You May press star two if you'd like to some of your question from the queue for any participants using speaker equipment necessary to pick you pick up your handset before pressing the star key.

As a reminder, if you are accessing this call by webcast you may submit type questions on your screen those questions. We answered during the call as time permits participants on the phone lines have the opportunity to ask questions. One moment. Please while we poll for questions.

And it does appear we have no questions on the phone lines I will now turn the call back over to our host Jamie Surat to discuss questions from the webcast.

Our first question from the web.

How did you need is 1.8 billion, 11.5% coupon affect the effort for lead to refinance that.

I I don't think its a one to one connection between their situation or not as you know as you know Lee leads the industry in most financial metrics, most notably double the margin compared to the industry and I think we're going to be in a.

Good position as we continue to Delever, the company and drive topline performance to pursue.

Hey, opportunistic financing that Tim mentioned earlier on our call if you'd like to add yes. The only thing I'd like to add you know this was a single.

Single lender transactions or private negotiation outside of your typical credit markets. So I don't think it will have a significant factor I think was favorable.

Is that some of them in the industry was able to.

Obtain a significant amount of financing in that that's good news for us.

Our next question did you repurchase the notes in the open market at a discount.

So I'll answer that this is Tim the note that we repurchase were just shy of the current call price so their discount to the call price but.

Still above par.

Our next question.

What do you estimate that the crossover will occur where in digital revenue each print revenue.

Well, we don't give guidance I can say, we're hyper focused on driving our digital transformation were digital revenue exceeds print revenue as I mentioned on the call. We plan to do that by focusing on the great contacts and relationships, we have with local retail accounts and then further monetizing our huge audiences and maximizing the potential in town news all of those efforts combined get to a digital inflection point, where digital outpaces sprint.

Our next question.

The board authorization, what actions have been taken to buy back the stock.

So as a reminder, our board has authorized us to buy back up to $10 million of lease stock over two years and to date, we have not repurchased any shares and so there's a number of factors that we consider when we are evaluating our decision to buy back stock.

In a number of those factors would include the current stock price of Big factors that were considering our alternate uses of our cash flows as well as our leverage ratio.

And so one of the things that we're looking at as we look to Opportunistically refinance our debt.

Our focus has been to reduce our leverage as quickly as possible to get the best execution. So thats. The big reason as to why we have not to date bought back any stock.

We have no more questions from our web participants I will now turn back the call to Kevin for closing remarks.

Thank you. Thank you for joining the call today. We appreciate your time your incident Lee.

Thanks for joining the call.

Thank you ladies and gentlemen at this time, we have reached the end of our question and answer session. This concludes our call.

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